Rule2024-00552
Corporate Bond Yield Curve for Determining Present Value
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 12, 2024
Effective
January 12, 2024
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document sets forth final regulations specifying the methodology for constructing the corporate bond yield curve that is used to derive the interest rates used in calculating present value and making other calculations under a defined benefit plan, as well as for discounting unpaid losses and estimated salvage recoverable of insurance companies. These regulations affect participants in, beneficiaries of, employers maintaining, and administrators of certain retirement plans, as well as insurance companies.
Full Text
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<title>Federal Register, Volume 89 Issue 9 (Friday, January 12, 2024)</title>
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[Federal Register Volume 89, Number 9 (Friday, January 12, 2024)]
[Rules and Regulations]
[Pages 2127-2132]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-00552]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9986]
RIN 1545-BQ57
Corporate Bond Yield Curve for Determining Present Value
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document sets forth final regulations specifying the
methodology
[[Page 2128]]
for constructing the corporate bond yield curve that is used to derive
the interest rates used in calculating present value and making other
calculations under a defined benefit plan, as well as for discounting
unpaid losses and estimated salvage recoverable of insurance companies.
These regulations affect participants in, beneficiaries of, employers
maintaining, and administrators of certain retirement plans, as well as
insurance companies.
DATES:
Effective date: These regulations are effective January 12, 2024.
Applicability date: These regulations apply for purposes of
determining the corporate bond yield curve under section 430(h)(2)(D)
of the Internal Revenue Code for months that begin on or after February
1, 2024.
FOR FURTHER INFORMATION CONTACT: Arslan Malik or Linda S.F. Marshall,
Office of Associate Chief Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes) at (202) 317-6700 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
Section 412 of the Internal Revenue Code (Code) prescribes minimum
funding requirements for defined benefit pension plans. Section 430
specifies the minimum funding requirements that apply generally to
defined benefit plans that are not multiemployer plans.\1\ For a plan
subject to section 430, section 430(a) defines the minimum required
contribution for a plan year by reference to the plan's funding target
for the plan year. Under section 430(d)(1), a plan's funding target for
a plan year generally is the present value of all benefits accrued or
earned under the plan as of the first day of that plan year.
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\1\ Section 302 of the Employee Retirement Income Security Act
of 1974, Public Law 93-406, 88 Stat. 829 (1974), as amended (ERISA),
sets forth funding rules that are parallel to those in section 412
of the Code, and section 303 of ERISA sets forth minimum funding
requirements that apply generally for defined benefit plans (other
than multiemployer plans) that are parallel to those in section 430
of the Code. Pursuant to section 101 of Reorganization Plan No. 4 of
1978, 5 U.S.C. App., as amended, the Secretary of the Treasury has
interpretive jurisdiction over the subject matter addressed in these
regulations for purposes of ERISA, as well as the Code. Thus, these
Treasury regulations issued under section 430 of the Code also apply
for purposes of section 303 of ERISA.
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Section 430(h)(2) provides rules regarding the interest rates to be
used under section 430. Section 430(h)(2)(B) provides that a plan's
funding target and target normal cost for a plan year are determined
using three interest rates: (1) the first segment rate, which applies
to benefits reasonably determined to be payable during the 5-year
period beginning on the valuation date; (2) the second segment rate,
which applies to benefits reasonably determined to be payable during
the next 15-year period; and (3) the third segment rate, which applies
to benefits reasonably determined to be paid after that 15-year period.
Under sections 430(h)(2)(C)(i) through (iii), each of these segment
rates is determined for a month on the basis of the corporate bond
yield curve for the month, taking into account only that portion of the
yield curve that is based on bonds maturing during the period for which
the segment rate is used.
Section 430(h)(2)(C)(iv), which was added to the Code in 2012 by
section 40211 of the Moving Ahead for Progress in the 21st Century Act,
Public Law 112-141, 126 Stat. 405, and has been modified several times
since then (most recently in 2021 by section 80602 of the
Infrastructure Investment and Jobs Act, Pub. L. 117-58, 135 Stat. 429),
provides interest rate stabilization rules under which the segment
rates are constrained by reference to the 25-year average segment
rates. Under section 430(h)(2)(C)(iv), if a segment rate for a month is
less than the applicable minimum percentage, or more than the
applicable maximum percentage, of the average of the corresponding
segment rates for years in the 25-year period ending with September 30
of the calendar year preceding the calendar year in which the plan year
begins, then the segment rate for that month is equal to the applicable
minimum percentage or the applicable maximum percentage of the
corresponding 25-year average segment rate, whichever is closest. The
last sentence of section 430(h)(2)(C)(iv)(I) provides that any 25-year
average segment rate that is less than 5 percent is deemed to be 5
percent.
Under section 430(h)(2)(D)(i), the term ``corporate bond yield
curve'' means, with respect to any month, a yield curve prescribed by
the Secretary for the month that reflects the average, for the 24-month
period ending with the month preceding such month, of monthly yields on
investment grade corporate bonds with varying maturities and that are
in the top three quality levels available. Section 430(h)(2)(D)(ii)
permits a plan sponsor to elect to use the corporate bond yield curve,
rather than the segment rates, to determine the plan's minimum required
contribution. The yield curve that applies pursuant to this election is
determined without regard to 24-month averaging. This election, once
made, may be revoked only with the consent of the Secretary.
Under section 430(h)(2)(F), the Secretary is instructed to publish
for each month the corporate bond yield curve (without regard to the
24-month averaging specification), the segment rates described in
section 430(h)(2)(C), and the 25-year averages of segment rates used
under section 430(h)(4)(C)(iv). The Secretary is also instructed to
publish a description of the methodology used to determine the yield
curve and segment rates which is sufficiently detailed to enable plans
to make reasonable projections regarding the yield curve and segment
rates for future months based on the plan's projection of future
interest rates.
Section 1.430(h)(2)-1 was issued in 2009 to provide rules regarding
the interest rates to be used under section 430. T.D. 9467, 74 FR
53004. Section 1.430(h)(2)-1(d) provides that the methodology for
determining the yield curve is provided in guidance that is published
in the Internal Revenue Bulletin. Notice 2007-81, 2007-2 CB 899,
describes the methodology used by the Department of the Treasury
(Treasury Department) to develop the corporate bond yield curve.
Section 1.430(h)(2)-1(d) also provides that the yield curve for each
month will be set forth in guidance published in the Internal Revenue
Bulletin. Monthly IRS notices set forth the corporate bond yield curve
for the month (without regard to the 24-month averaging specification),
the section 430 segment interest rates (before and after adjustment
pursuant to section 430(h)(3)(C)(iv)), and the 25-year average segment
rates (which are updated annually).
Section 417(e)(3) provides assumptions for determining minimum
present value for certain purposes, including the determination of a
lump-sum that is the present value of an annuity, and prescribes an
applicable interest rate for this purpose. Section 417(e)(3)(C)
provides that the term ``applicable interest rate'' means the adjusted
first, second, and third segment rates applied under rules similar to
the rules of section 430(h)(2)(C) for the month before the date of a
distribution or such other time as the Secretary may prescribe by
regulations. However, for purposes of section 417(e)(3), these rates
are determined without regard to the segment rate stabilization rules
of section 430(h)(2)(C)(iv). In addition, under section 417(e)(3)(D),
these rates are determined using the average yields for a month, rather
than the 24-month average used under section 430(h)(2)(D).
[[Page 2129]]
Under section 846(c), the Secretary determines the applicable
interest rate to be used by insurance companies to discount unpaid
losses on the basis of the corporate bond yield curve (as defined in
section 430(h)(2)(D)(i), determined by substituting ``60-month period''
for ``24-month period''). Under Sec. 1.832-4(c), the applicable
interest rate determined under section 846(c) is also used by insurance
companies to discount estimated salvage recoverable, unless the
Commissioner publishes applicable discount factors to be used for that
purpose.
A notice of proposed rulemaking and notice of public hearing (REG-
124123-22) that would revise the methodology for determining the
corporate bond yield curve was published in the Federal Register (88 FR
41047) on June 23, 2023. Two commenters submitted comments on the
proposed regulations. A public hearing on the proposed regulations was
scheduled for August 30, 2023, but was cancelled because no one
requested to speak. After consideration of these comments, these final
regulations are adopted with minor changes to the language from the
proposed regulations to provide more detail on the methodology for
determining the corporate bond yield curve.
Summary of Comments and Explanation of Revisions
These regulations specify the methodology used to develop the
corporate bond yield curve. This methodology is generally the same as
the methodology set forth in Notice 2007-81 but includes two
refinements to take into account changes in the bond market since 2007.
The regulations also amend the existing regulations under section
430(h)(2) to reflect the addition of the interest rate stabilization
rules of section 430(h)(2)(C)(iv) and to eliminate transition rules
that applied to plan years beginning before January 1, 2010.
One commenter expressed support for the rules set forth in the
proposed regulations. The other commenter raised various concerns
regarding the corporate bond yield curve.\2\ Those concerns are
discussed in this Summary of Comments and Explanation of Revisions.
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\2\ This commenter suggested that multiple yield curves be
published for different segments of the corporate bond market, such
as by industry, sector, or region. This suggestion is inconsistent
with the requirements of section 430(h)(2)(D) and (F), under which
the Secretary must publish a single corporate bond yield curve for
each month. In addition, this commenter expressed concern about the
impact of the proposed regulations on the determination of the
applicable federal rate and any resulting impact on the tax-exempt
bond market. However, pursuant to section 1274(d), the applicable
federal rates are determined with reference to the yields on
Treasury securities, not corporate bonds; thus, these regulations
have no effect on the determination of the applicable federal rates.
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Under these regulations, as under Notice 2007-81, the monthly
corporate bond yield curve for a month is defined as the set of spot
rates at specified durations. The specified durations are at 6-month
intervals ranging from 6 months through 100 years, and the spot rate at
a duration is the yield (when compounded semiannually) for a bond that
matures at that duration with a single payment at maturity. Each spot
rate at a specified duration on the monthly corporate bond yield curve
for a month is equal to the arithmetic average for each business day of
that month of the spot rates at that duration on the daily corporate
bond yield curves.
Under these regulations, as under Notice 2007-81, each spot rate on
the daily corporate bond yield curve is derived from a forward interest
rate function (that is, the projected instantaneous interest rate at
each point in time) that is defined by the selection of five
coefficients of B-splines determined using the bond data, taking into
account certain adjustment factors.
Two of those adjustment factors, which are included in the
methodology set forth in Notice 2007-81, take into account the ratings
of the bonds used to develop the daily corporate bond yield curve. The
third adjustment factor, which was not included in the methodology set
forth in that notice, is a hump adjustment variable that peaks at 20
years maturity \3\ and serves to capture the effects of the hump in
spot rates that is often seen around 20 years maturity.
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\3\ The hump adjustment variable is a mathematical function that
is a cubic spline in the interval from 10 years maturity through 30
years maturity made up of two polynomials with a smooth junction at
20 years maturity.
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Under the methodology used in Notice 2007-81, the spot rate at a
duration t could be calculated directly as the discount rate at that
duration derived from the forward interest rate function. However, the
addition of the hump adjustment variable under the proposed regulations
means that the calculation of the spot rates from the discount function
and the hump adjustment variable requires an intermediate step. This
intermediate step, which was implicit in the proposed regulations,
involves the determination of a par yield curve (that is, the curve in
which the rate at maturity t on the curve is equal to the yield for a
bond with maturity of t for which the price is the same as the
principal amount) that is calculated from the discount function and the
hump adjustment variable. In response to a commenter's request that the
regulations specify clear standards for the determination of the
corporate bond yield curve, these regulations describe this
intermediate step. Accordingly, these regulations clarify that the spot
rates are determined by first setting the spot rate at duration of \1/
2\ year on the daily corporate bond yield curve as the yield at
maturity of \1/2\ year from the daily par yield curve, and then
determining the spot rate for any later duration by applying an
iterative process based on the spot rates at earlier durations and the
daily par yield curve.
One commenter asked how the IRS handles the situation in which the
rating of a bond is upgraded or downgraded during a month, or a bond is
rated differently by different rating organizations for a single day.
Because the monthly corporate bond yield curve is developed from a set
of daily corporate bond yield curves, changes in ratings during the
month are automatically taken into account. In the case of a bond that
is rated differently by different ratings organizations on a single
day, the bond is treated as having the average of the ratings for that
day.
These regulations generally adopt the specification for the bond
data set for a month under Notice 2007-81 but modify an exclusion from
that bond data set. Under Notice 2007-81 and these regulations, subject
to certain exclusions, the bonds that are used to construct the daily
corporate bond yield curve for a business day are bonds with the
following characteristics: (1) maturities longer than \1/2\ year,\4\
(2) at least two payment dates, (3) designated as corporate, (4) high
quality ratings (that is, AAA, AA, or A) as of that business day from
the nationally recognized statistical rating organizations,\5\ (5) at
least $250 million in par amount outstanding on at least one day during
the month, (6) payment of fixed nominal semiannual coupons and the
principal amount at maturity,
[[Page 2130]]
and (7) maturity not later than 30 years after that day.
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\4\ Under Notice 2007-81 and the regulations, the data for
durations equal to or below \1/2\ year that is used to construct the
daily corporate bond yield curve consists of AA financial and AA
nonfinancial commercial paper rates, as reported by the Federal
Reserve Board.
\5\ Although section 939A(b) of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, Public Law 111-203, 124 Stat.
1376, generally prohibits federal agencies from issuing regulations
that apply a standard that is based on credit ratings from
statistical rating organizations, this prohibition does not apply to
the construction of the daily corporate bond yield curve because the
use of those credit ratings is required by section 430(h)(2)(D) of
the Code.
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Under Notice 2007-81 and these regulations, the following
categories of bonds are excluded from the bond data set: (1) bonds not
denominated in U.S. dollars, (2) bonds not issued by U.S. corporations,
(3) bonds that are capital securities (sometimes referred to as hybrid
preferred stock), (4) bonds having variable coupon rates, (5)
convertible bonds, (6) bonds issued by a government-sponsored
enterprise (such as the Federal National Mortgage Association), (7)
asset-backed bonds, (8) putable bonds, (9) bonds with sinking funds,
and (10) bonds with a par amount outstanding below $250 million for the
day for which the daily yield curve is constructed.
Notice 2007-81 also excluded callable bonds (unless the call
feature is make-whole) from the bond data set used to construct the
daily corporate bond yield curve. The regulations generally retain this
exclusion but narrow it. Under the proposed regulations, this exclusion
does not apply if the call feature is exercisable only during the last
year before maturity. This type of call feature has recently become
more widely used, and the inclusion of bonds with this feature in the
data set will result in a significantly larger pool of bonds that more
accurately reflects the market for high quality corporate bonds.
One commenter asked how the calculation of the yield of a corporate
bond is affected by any options embedded in that bond. The complexity
of the calculations involved in quantifying this effect is the reason
that corporate bonds with embedded put and call options have been
generally excluded from the set of bonds used to determine the
corporate bond yield curve in the past. However, as noted in the
preceding paragraph, including bonds with a call feature that is
exercisable only during the last year before maturity significantly
increases the pool of bonds that are taken into account in developing
the corporate bond yield curve, and the Treasury Department and the IRS
have determined that this feature does not significantly affect the
yields of these bonds. Accordingly, no adjustment will be made to
reflect the effect of this feature on bond yields.
Applicability Date
These regulations apply for purposes of determining the corporate
bond yield curve under section 430(h)(2)(D) for months that begin on or
after February 1, 2024.
Statement of Availability of IRS Documents
IRS Revenue Rulings, Revenue Procedures, and Notices cited in this
document are published in the Internal Revenue Bulletin (or Cumulative
Bulletin) and are available from the Superintendent of Documents, U.S.
Government Printing Office, Washington, DC 20402, or by visiting the
IRS website at <a href="http://www.irs.gov">www.irs.gov</a>.
Special Analyses
Regulatory Planning and Review (Executive Orders 12866 and 13563)
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
Regulatory Flexibility Act
It is hereby certified that this rule will not have a significant
economic impact on a substantial number of small entities. The vast
majority of plan sponsors of defined benefit plans that are subject to
section 430 choose to use the segment rates under section 430(h)(2)(C),
rather than the corporate bond yield curve under section 430(h)(2)(D),
to determine minimum required contributions. Furthermore, most of the
plan sponsors who choose to use the corporate bond yield curve for this
purpose are not small employers. Therefore, the methodology set forth
in these regulations for constructing the corporate bond yield curve
will not have a significant effect on minimum required contributions
for small employers. In addition, the insurance companies that are
required to use a modified version of the corporate bond yield curve to
discount unpaid losses are typically not small employers. Accordingly,
a regulatory flexibility analysis under the Regulatory Flexibility Act
is not required.
Pursuant to section 7805(f) of the Code, the proposed regulations
that preceded these regulations were submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business, and no comments were received.
Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. These regulations do not include any Federal mandate that
may result in expenditures by State, local, or Tribal governments, or
by the private sector in excess of that threshold.
Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These regulations do not have
federalism implications, impose substantial direct compliance costs on
State and local governments, or preempt State law within the meaning of
the Executive order.
Congressional Review Act
Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.),
the Office of Information and Regulatory Affairs designated this rule
as not a major rule, as defined by 5 U.S.C. 804(2).
Drafting Information
The principal authors of these regulations are Arslan Malik and
Linda S.F. Marshall of the Office of Associate Chief Counsel (Employee
Benefits, Exempt Organizations, and Employment Taxes). However, other
personnel from the Treasury Department and the IRS participated in the
development of these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, the Treasury Department and the IRS amend 26 CFR part
1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.430(h)(2)-1 is amended by:
0
1. Removing the phrase ``and transition rules'' in the last sentence of
paragraph (a)(1);
0
2. Revising paragraph (b)(2);
[[Page 2131]]
0
3. Removing the last sentence in paragraph (c)(1);
0
4. In paragraphs (c)(2)(i) through (iii), removing the phrase ``under
the transition rule of paragraph (h)(4) of this section'' and adding
the phrase ``under the interest rate stabilization rules in section
430(h)(2)(C)(iv)'' in its place;
0
5. Revising paragraph (d);
0
6. Removing paragraph (e)(3) and redesignating paragraph (e)(4) as
paragraph (e)(3);
0
7. In newly redesignated paragraph (e)(3)(ii), removing the phrase
``this paragraph (e)(4)'' and adding the phrase ``this paragraph
(e)(3)'' in its place;
0
8. Redesignating paragraph (e)(5) as paragraph (e)(4); and
0
9. Revising paragraph (h).
The revisions read as follows:
Sec. 1.430(h)(2)-1 Interest rates used to determine present value.
* * * * *
(b) * * *
(2) Benefits payable within 5 years. In the case of benefits
expected to be payable during the 5-year period beginning on the
valuation date for the plan year, the interest rate used in determining
the present value of the benefits that are included in the target
normal cost and the funding target for the plan is the first segment
rate with respect to the applicable month, as described in paragraph
(c)(2)(i) of this section.
* * * * *
(d) Monthly corporate bond yield curve--(1) In general--(i)
Construction of monthly corporate bond yield curve. For purposes of
this section, the monthly corporate bond yield curve for a month is
defined as the set of spot rates at specified durations. The specified
durations are at 6-month intervals ranging from 6 months through 100
years and the spot rate at a duration is the yield (when compounded
semiannually) for a bond that matures at that duration with a single
payment at maturity. The monthly corporate bond yield curve is
constructed as the average of the spot rates from the set of daily
corporate bond yield curves as specified in paragraph (d)(1)(ii) of
this section. Each daily corporate bond yield curve is constructed
using the methodology set forth in paragraph (d)(2) of this section
based on the data described in paragraph (d)(3) of this section. The
yield curve for each month will be published in the Internal Revenue
Bulletin. See Sec. 601.601(d) of this chapter.
(ii) Monthly corporate bond yield curve constructed through
averaging. Each spot rate at a specified duration on the monthly
corporate bond yield curve for a month is equal to the arithmetic
average, for each business day of that month, of the spot rates at that
duration on the daily corporate bond yield curves.
(2) Construction of the daily corporate bond yield curve--(i) In
general--(A) Calculation of spot rates. The spot rate at duration of
\1/2\ year on the daily corporate bond yield curve is set equal to the
yield at maturity of \1/2\ year from the daily par yield curve
described in paragraph (d)(2)(i)(B) of this section. The spot rate for
any later duration on the daily corporate bond yield curve is
determined by applying an iterative process based on the spot rates at
earlier durations and the daily par yield curve.
(B) Calculation of par yield curve. The daily par yield curve (that
is, the curve in which the rate at maturity t on the curve is equal to
the yield for a bond with maturity of t for which the price is the same
as the principal amount) is calculated from the discount function
described in paragraph (d)(2)(i)(C) of this section and the hump
adjustment variable described in paragraph (d)(2)(iii)(D) of this
section.
(C) Derivation of discount function. The discount function for a
day at duration t (denoted d(t)) is derived from the forward interest
rate function as described in paragraph (d)(2)(ii) of this section
(denoted f(z)) using the following equation:
[GRAPHIC] [TIFF OMITTED] TR12JA24.072
(ii) Determination of forward interest rates--(A) In general. The
forward interest rate function used to derive the discount function is
determined as a series of cubic polynomials (referred to as a cubic
spline) that have a smooth junction at specified knot points
(maturities of 0, 1.5, 3, 7, 15, and 30 years). The requirement that
the polynomials have a smooth junction at a knot point is satisfied if
the two polynomials that are meeting at the knot have the same value,
the same derivative, and the same second derivative at that knot point.
(B) Constraints on the forward interest function. The following
three constraints are placed on the forward interest rate function--
(1) The second derivative of the function is set to 0 at maturity
0.
(2) The value of the forward interest rate function at and after 30
years is constrained to equal its average value from 15 to 30 years.
(3) The derivative of the forward interest rate function is set to
0 at maturity 30 years.
(iii) Parameters for daily bond price model--(A) B-spline
coefficients. The assumed cubic spline for the forward interest rate
function can be described as a linear combination of B-splines, with
five parameters, which are determined taking into account the two
coefficients for the bond-quality adjustment variables described in
paragraphs (d)(2)(iii)(B) and (C) of this section and the coefficient
for the hump adjustment variable described in paragraph (d)(2)(iii)(D)
of this section. The five parameters and three coefficients are
determined using the bond data weighted as described in paragraph
(d)(2)(iv) of this section. After this weighting of the bond data, the
five parameters and three coefficients are chosen to minimize the sum
of the squared differences between the bid price for each of the bonds
(or ask price for commercial paper) and the price estimated for each of
those bonds determined using the specified parameters and coefficients,
and taking into account the bond's coupon rate, number of years until
maturity, and rating.
(B) Adjustment factor for share of bonds that are AA-rated. The
first adjustment variable is based on the proportion of bonds that are
rated AA within the universe of bonds in the data set that are rated AA
or AAA, weighted by par value. In the case of an AAA-rated bond the
adjustment variable described in this paragraph (d)(2)(iii)(B) is equal
to the product of the proportion described in the preceding sentence
and the number of years until maturity for the bond. In the case of an
AA-rated bond the adjustment variable described in this paragraph
(d)(2)(iii)(B) is equal to the product of (1- that proportion) and the
number of years until maturity for the bond. In the case of an A-rated
bond, the adjustment variable described in this paragraph
(d)(2)(iii)(B) is 0.
(C) Adjustment factor for share of bonds that are A-rated. The
second adjustment variable is based on the proportion of bonds rated A
within the universe of bonds in the data set, weighted by par value. In
the case of an AAA-rated bond or an AA-rated bond, the adjustment
variable described in this paragraph (d)(2)(iii)(C) is equal to the
product of the proportion described in the preceding sentence and the
number of years until maturity for the bond. In the case of an A-rated
bond, the adjustment variable described in this paragraph
(d)(2)(iii)(C) is equal to the product of (1- that proportion) and the
number of years until maturity for the bond.
(D) Hump adjustment variable. The hump adjustment variable is a
[[Page 2132]]
mathematical function that is a cubic spline in the interval from 10
years maturity through 30 years maturity made up of two polynomials
with a smooth junction (as described in paragraph (d)(2)(ii)(A) of this
section) at 20 years maturity. The spline rises from 0 at 10 years
maturity to 1.0 at 20 years maturity, then falls back down to 0 at 30
years maturity. The hump adjustment variable is 0 for maturities less
than 10 years and maturities greater than 30 years.
(iv) Weighting of bond data. The bond data are weighted in three
steps. In the first step, equal weights are assigned to the commercial
paper rates at the short end of the curve, and the par amounts
outstanding of all the bonds are rescaled so that their sum equals the
sum of the weights for commercial paper. In the second step, the
squared price difference for each commercial paper rate is multiplied
by the commercial paper weight, and the squared price difference for
each bond is multiplied by the bond's rescaled par amount outstanding.
In the third step, applicable for bonds with duration greater than 1,
the weighted squared price difference for each bond from the second
step is divided by the bond's duration.
(3) Data used--(i) In general. Except as otherwise provided in this
paragraph (d)(3), the bonds that are used to construct the daily
corporate bond yield curve for a business day are bonds with maturities
longer than \1/2\ year, with at least two payment dates, and that:
(A) Are designated as corporate;
(B) Have high quality ratings (AAA, AA, or A) as of that business
day from the nationally recognized statistical rating organizations;
(C) Have at least $250 million in par amount outstanding on at
least one day during the month;
(D) Pay fixed nominal semiannual coupons and the principal amount
at maturity; and
(E) Mature not later than 30 years after that business day.
(ii) Excluded bonds. The following types of bonds are not used to
construct the daily corporate bond yield curve for a date:
(A) Bonds not denominated in U.S. dollars;
(B) Bonds not issued by U.S. corporations;
(C) Bonds that are capital securities (sometimes referred to as
hybrid preferred stock);
(D) Bonds with variable coupon rates;
(E) Convertible bonds;
(F) Bonds issued by a government-sponsored enterprise (such as the
Federal National Mortgage Association);
(G) Asset-backed bonds;
(H) Callable bonds, unless the call feature is make-whole or the
call feature is exercisable only during the last year before maturity;
(I) Putable bonds;
(J) Bonds with sinking funds; and
(K) Bonds with an outstanding par amount below $250 million for the
day for which the daily yield curve is constructed.
(iii) Durations equal to or below \1/2\ year. The data for
durations equal to or below \1/2\ year that is used to construct the
daily corporate bond yield curve consists of AA financial and AA
nonfinancial commercial paper rates, as reported by the Federal Reserve
Board.
* * * * *
(h) Applicability date. This section applies for months that begin
on or after February 1, 2024. For rules that apply for earlier periods,
see 26 CFR 1.430(h)(2)-1 revised as of April 1, 2023.
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
Approved: December 27, 2023.
Lily Batchelder,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2024-00552 Filed 1-11-24; 8:45 am]
BILLING CODE 4830-01-P
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</html>Indexed from Federal Register on January 12, 2024.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.